Total federal spending in FY2007 was roughly $2.7 trillion, right? Wrong.
Outlaystotaled $2.7 trillion. But outlays don't include the all-important category of "tax expenditures," which are the functional equivalent of government spending. Tax expenditures are "revenue losses attributable to provisions of the Federal tax laws which allow a special exclusion, exemption, or deduction from gross income or which provide a special credit, a preferential rate of tax, or a deferral of tax liability." An example is a tax credit.
According to the latest CRS Report on tax expenditures (subscription required):

For FY2007, the Joint Committee on Taxation (JCT) estimates that tax expenditures will amount to $1,034 billion - over six times the FY2007 federal budget deficit.

Now, for a variety of reasons, total tax expenditures can't necessarily be regarded as total foregone revenues (eliminating a tax expenditure may alter taxpayer behavior, tax expenditures interact with each other, etc.). It follows, then, that tax expenditures can't just be added to outlays to get total federal spending. Nevertheless, total tax expenditures over $1 trillion is still an incredible number, especially given our current budget deficit.
It should also be noted that the tax expenditure process is notoriously inefficient, and often results in tax expenditures that overlap or even conflict with direct expenditures. Moreover, current tax expenditures tend to make the tax code more regressive.
The moral of the story: the federal government is more expensive than you think.

4
comments:

HA
said...

Nice write up. One major problem with Bartels's work is that he employs a one year lag to begin measuring the success of policy implemented in the honeymoon period. While this certainly makes sense for Democratic policy--direct forms of wealth transfer should take much less time to impact growth at all levels and inequality--it doesn't seem reasonable for Republican policies, which rely heavily on longer term market forces. Bartels provides some interesting evidence that a longer lag may be needed for Republican policy when he notes that all income categories seem to do better under Republican presidents in their 4th year, though he seems unsure of what to attribute this 4th year bump. State-level analysis on income inequality and economic liberalism generally finds the opposite to be true--free-market policies reduce the income gap.

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I'm a finance lawyer in New York. I used to focus on derivatives and structured finance (you know, back when there was a structured finance market). I spent the majority of my career at one of the major investment banks. My background is in economics and, unfortunately, politics.

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